The Transatlantic Growth Gap

The key to the economic-performance gap between the US and the EU in the last three years is the resilience of private consumption by American households. How were US households able to reduce their debt burden during a period of high unemployment and almost no wage gains while sustaining consumption growth?

BRUSSELS – The global financial crisis that erupted in full force in 2008 affected Europe and the United States in a very similar way – at least at the start. On both sides of the Atlantic, economic performance tanked in 2009 and started to recover in 2010.

But, as the financial crisis mutated into the euro crisis, an economic gulf opened between the US and the eurozone. Over the last three years (2011-2013), the US economy grew by about six percentage points more. Even taking into account the increasing demographic differential, which now amounts to about half a percentage point per year, the US economy has grown by about 4.5 percentage points more over these three years on a per capita basis.

The main reason for the gap is the difference in private consumption, which grew in the US, but fell in the eurozone, especially in its periphery. A retrenchment of public consumption actually subtracted more demand in the US (0.8 percentage points) than in the European Union (0.1 points). This might appear to be somewhat surprising in light of all of the talk about Brussels imposed austerity.

Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.

This is one of the unimportant causes of the growth gap. The US and Europe have a growth gap, because they have a productivity gap. There is a macroeconomic term called TFP or Total Factor Productivity. It turns out that the Americans are more productive then the rest. Why? you might ask. Well the reasons behind that are well-studied and well-documented in the academic literature.

"[...] the US economy has grown by about 4.5 percentage points more over these three years on a per capita basis."

This is the usual lying using statistics. "Per capita" actually refers to the 1%. Not a word about the *democratic differential* that grows. Median income is stagnating in the US. Eurozone may be worse, but inequality, definitely, has increased less than in the US.

I would agree with the rest Mr. Gros is writing, if it were not neglecting to mention how US banks are making up for the losses from "quick bankruptcy procedures". The FED is providing interest for excess reserves it also provided to all the banks, by means of QE. This is not possible in the Eurozone. If Mr. Gros wants to talk against this inability of the ECB and the part of the Maastricht treaty that established it, let him --please-- be more explicit! Some of us in the eurozone will largely appreciate it.

Daniel Gros, always reliably incisive, pinpoints a key source of European inflexibility. I’m sure he is right that differences in bankruptcy law and procedure do help explain the US-Europe growth recovery disparity. Therefore all ye good and competent EU civil servants, do please place bankruptcy law in the category of urgently needed flexibility-enhancing structural-institutional reform.

In addition Daniel provides the challenging empirical insight that austerity (at least as a decline in public consumption) has been considerably greater in the faster-recovering US than in the snail-pace Europe, contrary to all the tediously extreme Keynesian subterfuge about the evils of austerity which of late we so often encounter in these most august oped pages.

Will totally disagree with Mr. Gros on this article: it id not about the private consumption somehow from the air, but it is about the unorthodox methods and policies used by the US government such as the Quantitative Easing and Stimulus Packages for example..., the neo-liberal EU economics has not work out, whatsoever////

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